Mobile Phones Even More Mobile Customers

VODAFONE AND CELLNET, THE UNITED Kingdom's leading mobile phone suppliers, are losing market share to new digital competitors, One-2-One and Orange. Between July and September 1994, 227,000 subscribers joined Vodafone, but more significantly, 104,000 left. The pricing policy explains why Vodafone and CeBnct gain and lose so many customers. Vodafone pumps about £300 subsidy into the sale of each phone ant! connection, and then makes a huge profit on the phone's use. Often the mobile phone and its connection charge come free with a large purchase, such as a car or photocopier. Then, depending on the deal, subscribers pay between 15p and 50p per minute for what costs the cellular company 1.5p per minute off-peak and 0.5p for local calls. The margins helped Vodafone in 1997 to post pretax profits of £363 million on a turnover of £850 million. Gerry Whent, Vodafone's chief executive, describes the market: 'Ever;' month people are

leaving us for a variety of reasons. They've died, changed jobs, just decided to hand the phone hack, or whatever. A lot of people we take on are attracted to the idea of using a mobile phone, until they see the bill. If they only use it once a day, it's only a matter of time before they give it back.' He continues, 'This problem is not exclusive to us. I'd argue that Cellnet is losing just as many subscribers over the year. The important thing is that we are both taking in new ones.'

Li Ka-shing, Asian billionaire boss of Orange's parent company Ilutohinson Wbampoa. sees things differently. As Vbdafone subscribers scrutinize their bilk at renewal time, they are tempted to switch to the cheaper and technically more advanced Orange or One-2-One services. As Hans Snook, Orange's UK manager, says, 'Vodafone has rested on its laurels far too long. Now it's paying the price.' About 70 per cent of Orange's subscribers are switchers, not first-time buyers.

Hans Snook had better be right. By the end of 1995 Hutchinson spent £1 billion on developing the UK market -• 'the price for four brand new skyscrapers' in Li Ka-shing's Hong Kong home town. The investment is in the latest DCS 1800 digital technology that gives the same voice quality as conventional telephones. Digital is also intrinsically cheaper than Vodafone and Gellnet's older analogue systems and gives access to more features. The investment so far has bought Orange a total of 980 Nokia base stations and aerials costing £75,000 each across the United Kingdom, covering 50 per cent of the population. To get to its target 90 per cent coverage, Orange will need 2,000 stations. The fruity brand name is already a success. Launched using a huge teaser campaign, customers are already asking people to 'Gall me back on Orange' or saying 'Can I give you my Orange phone number?' One month at'ter launch the company already had 65 per cent unprompted name recognition.

Orange's pricing strategy is different from that of the analogue suppliers. Its phones are not cheap, costing between £150 and £300 each, and it doesn't give them away to get new customers. Instead Orange has introduced package calls to the market. Orange customers buy between £15 and £100 worth of calls a month. The cost per call is about half that of tine traditional networks.

Mercury's One-2-One has taken a less aggressive approach to the cellular market. It did not strive to go national, but concentrated on giving a cheap service to Londoners living within the M25 orbital motorway. That means that it can offer a package to users in its catchment area for much less than Orange. One-2-One gives unlimited free local calls, too. Will its good value for the 'not very mobile' phone user work? So far it has, and it has also tempted about 10,000 new subscribers a month, about half of them coming from Vodafone. As a second careful step Mercury has just extended One-2-One to the West Midlands, the United Kingdom's second largest conurbation, covering Birmingham and Coventry.

Orange and One-2-One became a hit with consumers after 25 December 1994 became the Christmas of the mobile phone, with many being given as gifts. The new growth markets switched from executives to travellers worried about being out alone at night. By 1999 forecasters expect Orange to outsell Vodafone to domestic consumers and One-2-One to be close to Cellnet in the same market. One-2-One has placed itself firmly in the gift market by offering unlimited free phone calls on Christmas Day. Will anyone, get through? Whatever happens, the signs are that the days of the 43 per cent profit margin for the cellular operators are coining to an end.'


1. Explain the different pricing of the mobile phone competitors.

2. Why don't the mobile phone companies used cost-based pricing, where customers just pay for their phone, die connection cost and the direct cost of them using the phone?

3. How is the emergence of the mobile phone as a gift or a security device likely to change its pricing?

4. What other mobile phone segments could emerge and how should products be priced for them?

5. How would you expect the marketing and pricing of mobile phones to change as the product life eyele evolves?

6. Is the 'churning' of customers a sign of poor marketing, overmarketing or just healthy competition?

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